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What Can Happen When You Buy Privately Owned Stocks?

February 17, 2012 1:05 AM

When you consider privately held companies, the misconception is that they are small and of little interest. In fact, there are quite a few big-name companies that are also privately held, check out the Forbes.com list of the largest private companies in 2006. They are often owned by the company founders and/or their families and heirs or by a small group of investors. Sometimes employees also hold shares of private companies.

They do not offer or trade its company stock (shares) to the general public on the stock market exchanges, but rather the company’s stock is offered, owned and traded or exchanged privately.

A few years ago, I helped a privately own bank raise capital by offering share of their stock for $10 a share with a 10 share minimum. That means a person who purchased 10 shares spent $100 dollars. A year or two later, the bank split their share in an offering and gave shareholder a 10 for 1 offering. The split simply means that the price is adjusted such that before and after market capitalization (value) of the company remains the same and dilution does not occur.

Here is a good example, the company’s sold 10 shares of stock priced at $10 per share. The market capitalization (value) is 10 × $10, or $100. The company splits its stock 10-for-1. There are now 100 shares of stock and each shareholder holds ten times the number of shares. The price of each share is adjusted to $1. The market capitalization (value) is 100 × $1 = $100, the same as before the split.

In a recent disclosure to the shareholder, the value of each share is at $1.28. This would simply mean that the market capitalization (value) is now 100 × $1.28 = $128.00. When dealing with privately own stock you must remember that the stocks are owned and traded or exchanged privately.
This really put an investor or shareholder in a position to focus on time value. Time value said simply is the value of a sum of money at one point in time and its value at another point in time. If the market capitalization (value) change over time and each share return to its original value of $10 a share, then we see the market capitalization (value) increase dramatically 100 × $10 = $1000.